Pending tax challenges Amazon Associates program in North Carolina

Amazon.com has taken a firm stand against pending state-level tax collection legislation. On June 18, the e-commerce giant reached out to North Carolina-based Amazon Associates to warn them that it might have to end relationships with associates located in North Carolina because of pending state-level tax collection legislation.

Participants in the Associates program place Amazon ads on their own Web sites and are compensated by Amazon for purchases made by visitors whom they refer to Amazon's Web site.

“Because the new law is drafted to go into effect once enacted – which could happen in the next two weeks – we will have to terminate the participation of all North Carolina residents in the Amazon Associates program on or before that same day,” the company said, in a message to the associates.

It assured the associates it would keep them apprised of North Carolina's actions regarding the proposed law.

In addition, Amazon's VP for global Public Policy Paul Misener sent a letter to California Governor Arnold Schwarzenegger on Monday, June 22, stating its opposition to California's pending tax legislation, which is similar to North Carolina's.

“Amazon.com respectfully opposes the new tax collection scheme of AB 178 (Skinner) and similar nexus legislation because it is unconstitutional and would not be an effective source of revenue,” the letter read. The letter also explained that if the law were to be passed, Amazon would have to end its advertising relationships with California-based participants in the Amazon Associates program.

Fred Nicely, Tax Counsel for the Council on State Taxation, a Washington, DC-based nonprofit trade organization, agreed. "It has suspect constitutionality," he said. Nicely indicated California and North Carolina are "shooting themselves in the foot," depriving residents and businesses in those states of compensation from those revenue sources.

Other states are weighing similar legislation. Patty Smith, director of corporate communications at Amazon, said the online retailer has sent out letters similar to what the company sent to North Carolina and California on a rolling basis to states including Connecticut, Hawaii, Minnesota, Rhode Island and Tennessee. "We're obviously monitoring the situation as other states consider these kinds of tax revenue schemes," Smith said.

Amazon supports federal legislation. "We've have said all along that we support the streamlined sales tax project which would apply the same standards in all 50 states even-handedly across all retailers," Smith explained. "We've been in support of this as opposed to the state-by-state approach which results sometimes in unconstitutional legislation being enacted."